The Privy Council's recent judgment in Skandinavska Enskilda Banken AB v Conway and another (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Limited) dated 29 July 2019 raises some issues of broad interest in relation to the "clawback" provisions in the Cayman Islands insolvency regime.
Skandinavska Enskilda Banken AB ("SEB") was a shareholder in the Weavering Macro Fixed Income Fund Limited (the "Fund"), acting as custodian and nominee for various underlying investors. In October 2008, SEB placed redemption requests for the entirety of that investment, payable in December 2008. Further substantial redemption requests were made for that, and subsequent, redemption dates by other investors. It transpired that the CEO of the Fund, Magnus Peterson, had perpetrated a fraud which was discovered in March 2009, and that the NAV of the fund had been grossly overstated- consequently, the Fund was not in a position to fully meet the redemption requests due in December 2008, let alone those payable on subsequent dates.
In mid-December, Mr Peterson directed that certain redemption requests be paid immediately, including those made by SEB. Subsequently, the Fund announced that 25% of the amount due to the December redeemers would be paid initially, with the remainder to be paid in instalments thereafter. Ultimately, approximately one third of December 2008 redemption requests, and the entirety of those submitted afterwards, were left unpaid.
Following the Fund's inevitable collapse, its liquidators sought to claw back the redemption payments made to SEB under section 145 of the Companies Law, alleging that they were voidable preferences. That claim succeeded both at trial and before the Court of Appeal.
The Privy Council decision
The key points arising from the Privy Council's unanimous dismissal of SEB's further appeal were as follows:
- There was a difference between the situation where a fund struck an inaccurate NAV because of "external fraud" (i.e. where directors strike a NAV in good faith which subsequently proves to be overstated because of fraud in an investment outside of the fund) and "internal" fraud (where the NAV is struck in the full knowledge that it is in fact misleading because of fraud within the fund).The former was binding and could not be challenged, but the latter was capable of being set aside on the application of an aggrieved investor by bringing an application against the liquidators on notice to all affected parties. However, this did not assist SEB because they had not been defrauded; in fact, they had received more than would have been the case had the NAV been accurate.
- The principle derived from Strategic Turnaround v Culross that redemption proceeds became a liability of the Fund on the redemption day, irrespective of any provision setting out a period within which payment would actually be made, was reaffirmed.
- The finding of the Court of Appeal that a "dominant intention to prefer" could be inferred from the fact the SEB was paid in circumstances where it was known that other redeemers were unlikely to be paid, was approved.
- Section 145 rendered preferences voidable, as opposed to void, and did not create a statutory remedy requiring the repayment of monies: instead the liquidators' claim lay at common law, in this case a restitutionary remedy in unjust enrichment. That remedy was available against a shareholder even where they acted as a nominee and had paid money on to an underlying client: as the registered shareholder the Fund owed its debt to them and thus they could properly be said to have been enriched by its payment. Their status as a nominee was irrelevant, whether or not it was known to the Fund.
- The laws of the Cayman Islands do not recognise a defence of change of position in respect of "clawback" claims of this type as it would be inconsistent with the policy underlying section 145 that favoured pari passu distributions. Accordingly, the fact that monies may have been remitted by a nominee to an underlying client against whom they may have no recourse (as was the case with SEB) does not afford a defence to a clawback claim.
Whilst there was a recognition that in some cases this could result in "harsh results", addressing that issue was said to be a matter for statutory rather than judicial intervention. The net effect of the Privy Council's decision is to strengthen the position of liquidators considering claims of this sort, and to reiterate the importance of a pari passu distribution amongst creditors in an insolvent company. The approach taken to nominee shareholders is particularly instructive: any party acting as a nominee should be aware that the Court will not draw a distinction between them and a party holding shares in its own right: they will be liable in precisely the same way.
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